How to Fill Out a W-4—Plus, 7 Reasons to Adjust Your Tax Withholding

Confused about how to fill out a W-4 at work? Laura explains what it is and how to complete it correctly. Plus, you'll learn 7 reasons when you should adjust your withholding so your employer doesn’t take out the wrong amount or leave you with an unexpected tax bill.

Many people get very anxious about filling it out because they don’t understand what an “allowance” is and they worry about what could happen if they make a mistake.

In this post, I’ll take the mystery out of the W-4 by explaining what it is and how to complete it correctly. Plus, I’ll cover 7 reasons you should adjust your withholding so your employer doesn’t take out the wrong amount or leave you with an unexpected tax bill.

What Is Tax Withholding?

The purpose of completing a W-4 form is to tell your employer how much federal income tax to deduct from your paycheck. And if you live in a state that collects income tax, you’ll also need to fill out a state form. There are just seven states that don’t tax ordinary income: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.

Your tax deductions are known as payroll “withholding,” because tax is withheld from you and paid directly to the IRS or the state instead. It’s like a credit against the total amount of tax that you’ll owe for the year.

Your tax deductions are known as payroll “withholding,” because tax is withheld from you and paid directly to the IRS or the state instead. It’s like a credit against the total amount of tax that you’ll owe for the year.

Companies are required to withhold money from your paycheck because income taxes are “pay-as-you-go” taxes. In other words, you must pay them as soon as you earn money during the year. That reduces the likelihood that you could evade paying them.

Employers are required to withhold 4 different types of taxes from your paycheck:

Federal income taxes

State income taxes (where applicable)

Social Security taxes

Medicare taxes

The amounts you ultimately owe each year for federal and state income tax depend on various factors such as your income, tax filing status (such as single or married filing jointly), and available tax deductions and credits you qualify for and claim.

There are 7 different federal income tax brackets that range from 10% up to 39.6% of income. States have their own tax systems that vary widely. The W-4 and state tax forms help employers estimate what you’ll owe so they can remit it on your behalf.

Estimating your Social Security and Medicare taxes is straightforward because you and your employer must pay set amounts each year. These two taxes are collectively known as FICA, which stands for the Federal Insurance Contributions Act tax.

Most of you probably know that Medicare is the federal program that provides a certain amount of health insurance benefits once you reach age 65. The benefits provided by Social Security are summarized by the program’s official name, OASDI. This acronym stands for old-age, survivors, and disability insurance.

Many people don't realize that employers pay half the amount of FICA on your behalf. So, in each paycheck you pay just 50% and your employer remits the remaining 50%. The amount of Social Security retirement benefits that you receive is tied to how much you and your various employers have paid into the program over your career.

In 2017, the tax rate for Social Security is 6.2%--up to a wage threshold of $127,200. So, employers withhold 6.2% from each of your paychecks and kick in another 6.2% on your behalf, for a total of 12.4% that goes to the IRS.

The Medicare tax rate is 1.45%, with no wage threshold. So, both you and your employer pay a combined total of 2.9% no matter how much you earn. So, FICA withholding, which is the combined rate for Social Security and Medicare, translates into you paying 7.65% and your employer paying 7.65%, for a grand total of 15.3%.

If you're self-employed, you pay both the employee and employer side of FICA tax, a bigger tax burden than when you’re an employee. To keep up with the tax, the IRS requires you to estimate your annual taxes and pay one fourth of the amount each quarter.

What Is a Form W-4?

The more allowances you claim on a W-4, the less tax your employer must deduct.

Now that you understand all the taxes that get withheld from your paycheck, let’s cover more about how to fill out your W-4 correctly. It’s called an allowance certificate because it adds up your “allowances,” which tells your employer how much to take out of your pay.

The more allowances you claim on a W-4, the less tax your employer must deduct. You get one allowance for yourself, one for a spouse, and one for each dependent you report on your tax return. Having less taken out sounds great—but remember that you’ll owe the difference on Tax Day. And if you don’t pay, the IRS charges penalties and interest, and can even garnish your paycheck to collect it.

On the flip side, when you claim fewer allowances, more tax is taken out of your paycheck throughout the year, giving you less take-home pay. When too much tax is withheld and you overpay for the year, the IRS issues you a tax refund.